Mid-Morning Look: August 24, 2018

Terrie AmengualDaily Market Report

Mid-Morning Look

Friday, August 24, 2018

U.S. equities full steam ahead, back at or near record highs for the S&P 500, Nasdaq Composite and Russell Small Cap 200 index as markets take comfort in commentary from various Fed speakers on the economy and policy outlook at its meeting in Wyoming. The Nasdaq Composite trades to new all-time highs, surpassing its closing high of 7,933 and intraday high of 7,937, as tech among top leaders after better earnings results from ADSK, SPLK, and VEEV in software sector. Industrials, Metals and Energy stocks also rebounding after yesterday’s slide. Fed Chairman Powell, in his prepared comments at the Jackson Hole central bank meeting, said gradual path of interest-rate hikes remains appropriate as there does not seem to be “an elevated risk of overheating.” Powell said inflation has recently moved up near 2% but “we have seen no clear sign of an acceleration” above that level. “My colleagues and I believe that this gradual process of normalization remains appropriate,” he said. The dollar dropping sharply, leading commodity prices such as gold and oil higher, while global stocks rebounding and on track for weekly gains. This week has also been a good one for retail earnings (TGT, LOW, URBN), though GPS, FL, HIBB results overnight taking a little steam out of consumer discretionary names today. Concerns about Turkey, trade issues with China, Mexico and Canada, and political drama all take a back-seat today.

Treasuries, Currencies and Commodities

· In currency markets, the US dollar extended its decline after Federal Reserve chief Powell said he does not reckon the American economy is overheating, renewing his call to only “gradually” raise interest rates; the dollar index, which had snapped a 6-day losing streak on Thursday, moved back near lows on the comments, lifting rival currencies across the board

· Precious metals surge, with gold prices rising over 1% and trading up near the $1,210 an ounce level as Fed speakers at today’s Jackson Hole central bank meeting say gradual path of interest-rate hikes remains appropriate as there does not seem to be an elevated risk of overheating

· Energy futures sharply higher amid a strong week of gains on bullish inventory data, a pullback in the US dollar, and fears of sanctions on Russia and Iran impacting global supply; WTI crude moves back above the $69 per barrel level, rising more than $1 and is on track to book its first weekly gain in nearly two months; Brent set for a 6% weekly advance, after three weeks of declines

· Treasury markets surprisingly calm despite volatile moves in stocks, currencies and commodity prices, with the 10-yr yield holding steady at 2.82% and 30-yr under 3%, though the shorter-term 2-yr yield up about 2 bps today to 2.62%

Economic Data

· Durable Goods Orders for July fell (-1.7%), slightly more than the expected (-1%) decline and durable goods new orders revised down to 0.7% rise for June from 0.8% increase; new orders ex-trans. rose 0.2% in July after 0.1% rise and new orders ex-defense fell 1% in July after 1.2% rise

Sector Movers Today

· Cannabis sector; Bloomberg reported that top alcohol producer Diageo Plc (DEO), aiming to boost growth and fend off competitors, is in discussions with at least three major Canadian producers to add cannabis-infused beverages to its portfolio (notes TAP and STZ have already moved into the space) – shares of TLRY, CRON, WEED among movers on reports

· Tobacco stocks MO and PM both downgraded at Jefferies saying reduced risk products in the tobacco industry seen reaching only 40% market share by 2026 in both the U.S. and initial launch markets, compared with a previous estimate of 50%-60%. In the segment, vapor products seen as being more popular than heated-tobacco versions, which will need more time to build awareness as they’re newer; also lowers tgts on Imperial Brands and BTI

· Hardware & Component news; HPQ reported a solid jump in quarterly profit amid gains in both its printing and personal systems divisions and raised midpoint of FY18 outlook…but Printing margins were flat sequentially, despite the company saying prior that it “expected margins to improve” in the near-term; UBNT Q4 results that beat on revenue with an 18% Y/Y growth but met on EPS while guidance missed mid-point (revenue of $1.1B-$1.2B (est. $1.12B) and EPS of $4-$4.80 (est. $4.23); ANET rises after replacing GGP in the S&P 500 index

· Retailers; GPS Q2 topped estimate and guidance was reaffirmed, but overall report was mixed as Old Navy remains strong but did slightly decelerate on a 2-year basis while Gap brand issues are lingering into 2H (comp sales fell -5% for Gap brand) and Athleta slowed; ROST Q2 EPS and sales topped consensus on better comp sales of up 5% vs. est. 2.5%, but shares were pressured on gross margin concerns (several analysts defended shares); BKE posts earnings beat as comps rose 1.4% and online sales gained 8.6% to $21.2M

· Sporting goods/footwear apparel space pressured after FL and HIBB quarterly results; HIBB shares plunge as slashes its profit outlook after unexpected Q2 EPS loss; expects comparable sales to be -1.0% to +1.0% in FY19 and EPS $1.57-$1.75 below prior $1.65-$1.95; meanwhile, FL shares fall as Q2 EPS of 75c beat by 5c on slightly better sales of $1.78B but comp sales only rose 0.5% vs. est. 0.7% (shares of DKS, UAA, NKE active on report)

       Stock GAINERS

· ADSK +14%; beat consensus estimates on all key metrics including a 2% beat on revenue, 4% beat on billings, and op margin of 10.3% (vs. est. 9%) and total ARR of $2.35B beat by 3%

· AMD +4%; rebounds after brief pullback, back to 52-week highs with tech rally

· ANET +8%; after replacing GGP in the S&P 500 index

· NFLX +3%; upgraded to buy at SunTrust with their Subscriber Tracker through July pointing to 3Q Domestic/Int’l subs solidly in-line/ahead (recent Japan price increase, app store billing tests may also suggest positive subscriber trends) and with 4Q consensus reasonable

· SEP +3%; to be acquired by ENB for a sweetened deal of $3.3B, raising its offer to 1.111 of its common shares for each Spectra unit, compared with its previous offer of 1.0123 of its shares https://reut.rs/2BIQygB

· SPLK +14%; Q2 top line beat and raised guidance for the year as expects 550 net new customers (versus 500 2Q18 and 450 last quarter)

· VEEV +8%; solid quarter headlined by 25% revenue growth and 35% operating margins


· CBPO -15%; the company rejected a $3.9 billion offer from a consortium led by its former CEO and said an affiliate of CITIC Capital had also withdrawn a competing bid https://reut.rs/2BKMZXo

· CMI -1%; downgraded to underweight at JPM and slashed tgt to $137 from $156 citing concerns that the North America truck cycle had peaked and as demand from China slows

· DBX -4%; on the expiration of the IPO lockup period today

· FL -12%; as Q2 EPS of 75c beat by 5c on slightly better sales of $1.78B but comp sales only rose 0.5% vs. est. 0.7%

· HIBB -28%; slashes its profit outlook after unexpected Q2 EPS loss; expects comparable sales to be -1.0% to +1.0% in FY19 and EPS $1.57-$1.75 below prior $1.65-$1.95

· SCWX -10%; after UBS downgraded to sell as noted shares are +53% YTD as valuation has expanded off trough levels

· TUSK -10%; downgrade to Market Perform at Raymond James as company’s work in Puerto Rico looks to be slowing, which is driving confusion regarding the totality of the opportunity


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